IMF Study: India's Digital Reforms Boost Small Firm Productivity

The study says "public administration digitalisation, carried out state-by-state in India between 2010 and 2015, led to an improvement in micro-enterprise productivities," based on national survey data.

Researchers examined firm-level data from two nationwide surveys covering 2010-11 and 2015-16. They compared firms across states that implemented different levels of digital reforms in areas such as tax filing, permits, inspections and dispute resolution.

"We find that states that undertake more public administration digitalisation experience higher productivity growth and lower productivity dispersion among firms," the report said.

The reforms were part of a broader effort to improve the business climate. In 2014, states agreed to a "98-point action plan" aimed at simplifying regulations and expanding digital systems.

The paper groups reforms into six areas: tax systems, construction permits, environment and labour compliance, inspections, commercial disputes and single-window clearances. States that implemented more of these reforms recorded higher total factor productivity.

Digital tools reduced administrative burdens, especially for small firms. "Digitalisation of administrative processes can significantly reduce compliance costs," the authors said.

The study says digitised systems - including online tax filing and automated approvals - improve transparency and cut delays. They also reduce informal costs and limit discretionary decision-making.

"By automating and making processes more transparent, digitalisation levels the playing field for all businesses," the report said.

The analysis shows firms in more reform-oriented states consistently outperformed those in less-reformed states. Gains were seen in both higher productivity and reduced dispersion between firms.

The report also finds that "the greater the difference in business environment reforms, the greater the gains in the total factor productivity."

At the same time, returns diminished as reforms increased, suggesting early reforms delivered the biggest gains.

The study uses a difference-in-difference model with matched firms across states. It also tests results using firms in border districts to control for regional variations, with similar findings.

The reforms appear to improve how resources are allocated. Lower dispersion in productivity suggests more efficient use of capital and labour.

India's micro, small and medium enterprises sector is a key part of the economy. The paper notes MSMEs account for "around 35 percent of manufacturing outputs" and employ "around 110 million workers."

Most of these firms operate informally and are sensitive to regulatory costs.

India's reform push in the mid-2010s coincided with improvements in global business rankings and wider use of digital governance. The IMF paper indicates these changes have delivered measurable gains, particularly for small firms that dominate the economy.

- IANS